Question

Question: 2(5 marks) Answer the following questions: 1. What is the advantage of having a single set of accounting standards used worldwide? 2. For a U.S. Multinational Corporation, what are the steps required for consolidating the financial statements of foreign subsidiaries? 3. Many countries have recently liberalized their investment laws. What is the primary reason for these actions? 4. Assume that ABCO is a U.S. multinational corporation. Its foreign subsidiaries must report income in their respective countries according to GAAP in those countries. How must ABCO report its consolidated financial statements?

Answer 1

1 . Nowadays businesses are done on a global basis. Fund raising is done from a different country having excess funds, raw material is purchased from a different company having excessive raw material , production is done on some other country where factors of production is cheap and sale is done somewhere else.

Now if company has to raise funds then investors will first of all analyze it's financial statements . If every country would be having different - different standards for preparing those financial statements then it can create problem for investors to analyze financial investment of the company and accordingly grant funds. Also when raw material supplier will supply raw material in another country on credit basis then he would like to know the short term liquidity position if it's customer again of standards for preparing financial statement will be different then again it will create problem . in order to eliminate all such problems and to provide ease of doing business single set of accounting standards must be there worldwide . This is the biggest advantage of having single set of accounting standard worldwide. Also it reduces the accounting cost for multinational corporation.

2. For a US multinational corporation there are two steps required for consolidating the financial statement of foreign subsidiaries which are as follows :-

A . Foreign subsidiary's financial statements must be restated according to U.S. GAAP.

B. The next step is to convert the account balances into U.S. Dollars.

3. Many countries have recently liberalized their investment laws so as to attract more and more foreign direct investment into the country. Many sectors of the economy have been opened for for foreign companies to investment. Therefore, the primary reason for liberalizing investment law was to attract foreign direct investment .

4 . It should be noted that ABCO is a US multinational corporation , therefore US GAAP must be used for it's consolidated financial statements . Further IFRS must be finally used to consolidate all of foreign subsidiaries financial statements.